While the futures markets are currently pointing to a modest rise at the opening tomorrow, stocks have suffered a fairly dramatic two-day selloff. This is always unsettling, of course. Rising markets feel better, but anyone who has been around markets for any length of time knows that corrections are nothing new, and are in fact normal and necessary in a healthy market. They are a reminder that investing in the equity markets is serious business, and is not for the faint of heart.

Financial pundits will offer reasons for the selloff, typically referencing China trade tensions or interest rates, but it is hardly certain. Further, explaining yesterday’s or today’s market moves does us little good in anticipating tomorrow’s direction.

Mohamed El-Erian published an interesting note in BloombergOpinion (link below) with his view on broad changes in the market. He posits that the Federal Reserve policy shift, from years of injecting liquidity into markets following the great financial crisis of 2008, to a new era in which the Fed no longer provides such support, is having a dramatic effect. Under the new Fed policy, assets and their valuations must stand up on their own fundamentals—no more free ride. We actually would welcome this new paradigm, if he is correct, because (1) it should favor investors like us who understand and evaluate fundamentals; and (2) business fundamentals are actually looking quite good across many sectors of the economy.

El-Erian’s other point is that this shift may introduce volatility as the markets adapt to these changes. Be prepared for this, but do not lose sight of the long term and do not lose faith in markets.

From our perspective, our investment strategy of focusing on high quality businesses makes us confident that we are well prepared to weather any storm in the markets over the long run. Moreover, we think that we are well positioned to take advantage of the higher volatility by deploying any available cash in your portfolios into new investment opportunities that might emerge in the near term.

Please give us a call if you would like to discuss this further.

With best wishes,

Kurt Hoefer, CFA

Click here to read the Bloomberg Opinion